WSJ Article on Geolocation Data Highlights Risks for Fund Managers

Wednesday, November 7, 2018

On Friday, the WSJ published an article detailing how companies are monetizing smartphone location data by selling it to hedge fund clients. The data vendor featured in the WSJ article obtains geolocation data from about 1,000 apps that fund managers use to predict trends involving public companies. However, as we’ve noted, the use of alternative data collection for investment research purposes may give rise to a host of potential issues under relevant laws.

Alternative data sets may conceivably contain material nonpublic information (MNPI), or information that, when aggregated, could be considered MNPI. Trading while in possession of such information might lead to liability under the securities laws if confidential information has been “misappropriated” in breach of a duty owed to the source of the information. If data has been collected in a manner considered “deceptive,” then there is a risk that trading on that information may be considered part of a fraudulent scheme in violation of the anti-fraud provisions under the securities laws.

Fund managers who use such data need to be careful. One concern is whether vendors have obtained appropriate consents to both the usage and sharing of the information. Many smartphone users may not be aware that their phone is sharing location data. Another concern is heightened risk of the data containing personally identifiable information (PII) or information which can readily be linked to PII. The vendor highlighted in the WSJ article apparently scrubs location data of personally identifiable information, and most data collectors de-identify or anonymize data that comes from sources that contain PII. Fund managers who purchase scrubbed data from third parties should check to ensure the information they receive is appropriately de-identified or anonymized and, if not, take steps to remove all identifying information.

Fund managers should also be aware of a host of other potential concerns involving collection and use of alternative data. For example, the Computer Fraud and Abuse Act (CFAA) prohibits access to information from a computer, website, server or database that is without authorization or in a way that exceeds authorized access. The Electronic Communications Privacy Act prohibits the collection or use of communications collected in violation of the Act. Other potential concerns involve claims as varied as copyright to breach of contract.

When using alternative data sets, due diligence and appropriate representations are required in order to minimize risk.

Joshua M. Newville is a partner in the Litigation Department in New York. His practice focuses on commercial litigation and regulatory investigations. Mr. Newville advises companies and individuals in securities litigation and compliance matters. He also focuses on internal investigations and enforcement matters. Prior to joining Proskauer, Josh was senior counsel in the U.S. Securities and Exchange Commission’s Division of Enforcement, where he investigated and prosecuted violations of the federal securities laws. Josh served in the Enforcement Division’s Asset...

Jeffrey Neuburger is co-head of Proskauer’s Technology, Media & Telecommunications Group, head of the Firm’s Blockchain Group and a member of the Firm’s Privacy & Cybersecurity Group.

Jeff’s practice focuses on technology, media and intellectual property-related transactions, counseling and dispute resolution. That expertise, combined with his professional experience at General Electric and academic experience in computer science, makes him a leader in the field.

As one of the architects of the technology law discipline, Jeff continues to lead on a range of business-critical transactions involving the use of emerging technology and distribution methods. For example, Jeff has become one of the foremost private practice lawyers in the country for the implementation of blockchain-based technology solutions, helping clients in a wide variety of industries capture the business opportunities presented by the rapid evolution of blockchain.

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